What it means for US stocks to be in a bear market

Wall Street has officially fallen into a bear market as investor sentiment is hammered by soaring inflation, rising interest rates and worries about a looming recession in the world’s largest economy.

A bear market occurs when a stock index like the S&P 500 falls by 20% over a sustained period from a recent high. Conversely, a bull market happens when stocks rise 20% from a recent low.

On June 13, the S&P closed in bear market territory for the first time since March 2020, as it slipped 3.9% to 3,749.63, its lowest since March 2020, and the second bear market of the pandemic era. The S&P sank deeper on Thursday, June 16, to close at a new low since December 2020.

2020 market crash

The last time that US stocks entered a bear market was in March 2020 at a time when many nations implemented lockdowns to prevent the spread of COVID-19 cases. That period marked the first time in 11 years that the Dow Jones Industrial Average entered a bear market, with the S&P 500 and the Nasdaq following suit.

Stocks shed a third of their value in 33 days at the time, according to data compiled by Ed Yardeni, an economist who tracks stock swings. It took six months for the S&P to recover, helped by government stimulus and policy actions by the Federal Reserve, according to The New York Times.

Not a bug in the system

During bear markets, investors — of stocks, cryptocurrencies, and 401k plans — become more anxious and make the common mistake of liquidating their assets over fears that a rebound would be unlikely.

While fear of losses are understandable, investors should know that bear markets, crashes and corrections are inevitable and are all a feature of financial markets and not a bug in the system.

There have been 14 bear markets since the World War II, including the current one, and recoveries take 23 months on average, The Washington Post reported last week, citing Sam Stovall, chief investment strategist at CFRA.

"These things have to happen every once and a while for the system to function properly and wash out the excesses,” fund manager Ben Carlson said in his book called A Wealth of Common Sense. Carlson said investors have to mentally prepare themselves for dealing with losses.

Enduring bear markets

Long-term investors, such as those who ought to keep their investments for retirement purposes, may take advantage of the current bear market to buy the dip as stocks tend to offer strong returns in the long run.

Morgan Stanley last month released a list of some high-quality stocks to buy to weather the bear market.

The list includes Abbott Laboratories (NYSE:ABT), The Coca-Cola Co. (NYSE:KO), Linde plc (NYSE:LIN), Becton, Dickinson and Company (NYSE:BDX), Johnson Controls International plc (NYSE:JCI), Anthem Inc. (NYSE:ANTM), The Procter & Gamble Company (NYSE:PG), Comcast Corp. (NASDAQ:CMCSA), Exxon Mobil Corp. (NYSE:XOM), and Mastercard Inc. (NYSE:MA).

The bank kept an overweight rating on all these stocks

However, dip buyers should not fall victim to temporary bear market rallies. Rallies in the middle of bear markets are common.

Divesting stocks during a bear market is also common as it helps investors stem further losses, although the move could prevent them from recouping losses and cashing in on future gains.

Chad Langager, co-founder of Second Summit Ventures, suggests diversifying portfolios between a variety of asset classes, not just the stock market.